Out with the old money, in with the new

WHEN the Future of Financial Advice legislation comes into effect there will be two classes of investors in Australia, those with old money and those with new.

People with old money will need it to work harder as their returns will continue to be eroded by commissions. Those with new money will have their investment returns protected by FOFA.

Despite the huge pressure exerted by financial planning and investment industry groups, the FOFA reforms as they were first announced will remain intact with few changes. One of the changes does affect when the reforms will become a mandatory code of practice. Originally, FOFA was to apply from July 1, but now the new code of practice will be voluntary for 12 months and come into full effect on July 1 next year.

The delay does provide this important question that investors can ask after July 1, 2012, when seeking financial advice: ''Do you voluntarily comply with all the FOFA reforms?'' If the answer is no, keep looking until you find an adviser that says yes.

The two most powerful components of the reform are the best-interest obligation and the ban on conflicted remuneration.

The best-interest obligation requires anyone giving financial advice to put the interest of their clients first ahead of all other considerations, especially before their own ability to earn income from clients.

The inclusion of this component of FOFA means there has been financial planners that have put their interests ahead of clients'.

The ban on conflicted remuneration is effectively a ban on commissions. From July 1 next year, all licensed financial service companies and their representatives will be banned from receiving any benefit that might have influenced financial product advice given to retail clients. The exceptions include life insurance, general insurance and sharebroking services.

One win the financial planning industry had in relation to the reforms was the compulsory opt-in requirements. Originally all advisers would have had to obtain their clients' permission every two years to continue to charge a fee for ongoing financial advice.

The opt-in requirement was included, as Bill Shorten put it, ''to ensure clients do not pay open-ended ongoing fees while receiving little or no service''.

As a result of the changes advisers can be exempted from the opt-in provisions if they are bound by a professional code of conduct. The exemption must be in writing and will be issued by the Australian Securities and Investments Commission if it is satisfied that the code of conduct means the opt-in requirement need not apply.

The FOFA regulations will apply to contracts after July 1 next year, effectively creating new-money investors. Anyone who invested before then will need to review their investments, including superannuation, to ensure their returns are not subject to commissions, specifically trailing commissions, which are often embedded in financial products.

Those with old-money investments can either change the investment product they are in after July 1, 2013, or they can change to an adviser now that has always been fee-for-service and will rebate in full the trailing commission.

The important message is people must make the effort to review their investments to see if they need to change.